471

THEODORE R. ROLFS AND JULIA A. GALLAGER, PETITIONERS

v. COMMISSIONER OF INTERNAL REVENUE, 

RESPONDENT

Docket No. 9377–04. Filed November 4, 2010. 

In 1998 Ps donated a house to their local volunteer fire 

department (VFD) to be used for firefighter and police 

training exercises and eventual demolition. Within several 

days, the VFD conducted two training exercises at the house 

and burned it down. Ps claimed a deduction for a charitable 

contribution of $76,000 on their Federal income tax return for 

1998 on account of their donation of the house to the VFD and 

amended their petition to assert that they are entitled to 

deduct $235,350, the house’s reproduction cost. R contends 

that Ps are not entitled to any deduction because Ps received, 

in exchange for the property donated, a substantial benefit in 

the form of demolition services, the value of which exceeded 

the value of the property donated (quid pro quo argument). R 

472 135 UNITED STATES TAX COURT REPORTS (471) 

1 Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, 

as in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice 

and Procedure. 

determined that Ps are liable for an accuracy-related penalty 

under sec. 6662(a), I.R.C. and, in his answer, asserted in the 

alternative an accuracy-related penalty under sec. 6662(h), 

I.R.C. Ps contend that the Court should not consider R’s quid 

pro quo argument because it is new matter that R raised for 

the first time on brief. Held: R’s quid pro quo argument is not 

new matter and will be considered, as Ps raised the issue in 

their petition. Held, further, Ps did not make a charitable contribution within the meaning of sec. 170(c), I.R.C., as a result 

of their donation of the house because they received a 

substantial benefit in exchange for the donation and have 

failed to show that the value of the property donated exceeded 

the value of the benefit received. United States v. Am. Bar 

Endowment, 477 U.S. 105 (1986), followed. Held, further, Ps 

acted with reasonable cause and are accordingly not liable for 

any accuracy-related penalty under sec. 6662(a) or (h), I.R.C. 

Michael G. Goller, Robert E. Dallman, and Michelle L. 

Mukhtar, for petitioners. 

James E. Schacht and Mark J. Miller, for respondent. 

GALE, Judge: Respondent determined a deficiency of 

$19,940 in petitioners’ Federal income tax for 1998 and an 

accuracy-related penalty equal to 20 percent of the underpayment under section 6662(a). 1 By their amended petition, 

petitioners aver that they are entitled to a charitable contribution deduction of $235,350, rather than the $76,000 

claimed on their return, as a result of a donation of a house 

to a local volunteer fire department, resulting in an overpayment of $39,672 for 1998. By answer to the amended petition, respondent asserts that petitioners are liable for a penalty under section 6662(h) for a gross valuation 

misstatement. The issues for decision are: (1) Whether petitioners are entitled to a deduction for a charitable contribution under section 170(a) in connection with their donation of 

a house to a local volunteer fire department for training exercises and demolition and (2) whether petitioners are liable 

for any accuracy-related penalty under section 6662. 

FINDINGS OF FACT 

Some of the facts have been stipulated, and the stipulated 

facts and attached exhibits are incorporated in our findings 

(471) ROLFS v. COMMISSIONER 473

by this reference. Theodore R. Rolfs and Julia A. Gallagher 

(hereafter, petitioners, and Theodore R. Rolfs alone, petitioner) were married during the taxable year 1998 and filed 

a joint Federal income tax return for that year. Petitioners 

resided in Wisconsin at the time the petition was filed. 

The Lake Property

On November 27, 1996, petitioners paid $600,000 for a fee 

simple interest in a 3-acre lakefront property at 5892 Oakland Road in the Village of Chenequa, Wisconsin (lake property). The lake property was on Pine Lake in an area known 

locally as ‘‘lake country’’—a desirable residential area where 

lakefront houses have historically commanded premium 

prices. The lake property was accessed by a private road 

owned by an association, the members of which were the 

homeowners living on the road. 

At the time of purchase there were several improvements 

on the lake property including a house (lake house), a 

detached garage, a boathouse, and a well and septic system. 

The lake house, originally built in approximately 1900, was 

a 11⁄2-story structure with 3,138 square feet of living space, 

including a stone facade addition that was constructed in the 

1950s. The lake house was in good condition and habitable, 

though in need of remodeling in petitioner’s view. 

For 1998 the Village of Chenequa, Waukesha County, Wisconsin, assessed the lake property at $460,100, allocating 

$323,000 to the land and $137,100 to the improvements, for 

local property tax purposes. 

After acquiring the lake house, petitioners were initially 

undecided regarding whether to remodel it or tear it down. 

Their deliberations were resolved when petitioner Julia A. 

Gallagher’s mother, Beatrice Gallagher (Mrs. Gallagher), 

suggested in late 1997 that petitioners demolish the lake 

house, build a new house to her specifications as her residence in its place, and then exchange the lake property for 

her existing residence. Petitioners agreed to Mrs. Gallagher’s 

proposal, and they carried out the plan as described below. 

Petitioners had a cordial relationship with Mrs. Gallagher 

during the periods relevant to this case.

474 135 UNITED STATES TAX COURT REPORTS (471) 

2The letter contains a typographical error in that the correct address of the lake property is 

5892 Oakland Road. 

Demolition of the Lake House

Sometime in the latter part of 1997 petitioner determined 

that it would cost $10,000 to $15,000 to demolish the lake 

house and remove the debris. Around the same time, petitioner learned from his brother of an individual who had 

claimed a charitable contribution deduction for donating a 

residence to a local fire department to be burned down. Petitioner decided to donate the lake house to the Village of 

Chenequa Volunteer Fire Department (VFD) for firefighter 

training exercises and demolition in a controlled burn and to 

claim a charitable contribution deduction for the value of the 

lake house. 

In early October 1997 petitioner obtained the necessary 

approval for the burn from the Wisconsin Department of 

Natural Resources (DNR), subject to petitioner’s notifying the 

DNR of the actual date of the burn. 

On February 10, 1998, petitioner sent a letter to Gary 

Wieczorek, the chief of the VFD and of the Chenequa Police 

Department (Chief Wieczorek), which stated: 

As we have discussed, I would like to donate our house located at 5192[2]

Oakland Road in the Village of Chenequa to the Fire and Police departments of the Village for training and eventually demolition. This letter 

shall serve as an acknowledgment that it is my intention to donate the 

house for such purposes. The house is available immediately. If any further approvals are needed please contact me. 

Chief Wieczorek understood that petitioners donated the 

lake house to the Village of Chenequa for the limited purpose 

of using the structure for training exercises of firefighters 

and police, and with the ultimate aim of having the VFD burn 

it down. He also understood that petitioners expected that 

the lake house would be destroyed within ‘‘the first part of 

that year [1998]’’. Chief Wieczorek further understood that 

the VFD could not use the lake house for any other purpose 

than training exercises that would include its destruction by 

fire. 

Sometime shortly before February 18, 1998, the Chenequa 

Police Department used the lake house for a training exercise. On February 18, 1998, the VFD conducted an initial 

training exercise at the lake house. On February 21, 1998, 11 

(471) ROLFS v. COMMISSIONER 475

days after petitioner’s letter donating the lake house, the VFD

conducted a second training exercise and burned the structure to the ground. 

The firefighter training exercises at the lake house allowed 

the VFD to satisfy monthly training requirements imposed 

under Wisconsin State law. Chief Wieczorek believed the 

firefighter training exercises conducted at the lake house 

were superior to the training exercises otherwise available to 

the VFD. 

On April 1, 1998, Chief Wieczorek sent a letter to petitioner which stated: 

This letter is in receipt of your donation to the Village of Chenequa and 

its Fire Department in the amount of $1,000, check #4820 and the donation of the use of your home at 5892 Oakland Road for training purposes. 

The home at 5892 Oakland Road was used during the month of February 

for training by the Critical Incident Team and the Police Department and 

for further training by the Fire Department in roof ventilation and smoke 

drills. On February 21, 1998, the home was destroyed at a practice fire 

with our mutual aid fire departments in which we practiced using water 

supply in a non-hydranted area. 

Chief Wieczorek solicited the $1,000 payment from petitioners (referred to in the letter quoted above) to defray the 

costs that the Village of Chenequa otherwise would incur in 

connection with the training exercises the VFD conducted at 

the lake house. 

On March 30, 1998, approximately 5 weeks after the 

destruction of the lake house, petitioners entered into a contract to have a new residence constructed on the lake property at a cost of approximately $383,000. The construction 

contract did not itemize the costs of construction. 

Petitioners’ 1998 Income Tax Return

Petitioners timely filed a joint Federal income tax return 

for the taxable year 1998. Petitioners attached to the return 

a Form 8283, Noncash Charitable Contributions, reporting 

that the lake house had a cost or adjusted basis of $100,000, 

and that the lake house was appraised at a fair market value 

of $76,000. The Form 8283 included a ‘‘Declaration of 

Appraiser’’ signed by Richard S. Larkin and a ‘‘Donee 

Acknowledgment’’ signed by Chief Wieczorek. Petitioners 

claimed on Schedule A, Itemized Deductions, a deduction of 

$12,626 attributable to charitable contributions by cash or 

476 135 UNITED STATES TAX COURT REPORTS (471) 

3The record does not include an itemization of this amount, and it is unclear whether petitioners claimed a deduction for the $1,000 remitted to the Village of Chenequa Volunteer Fire 

Department (VFD) to defray the costs incurred in connection with the use of the lake house for 

training exercises. 

check 3 and a deduction of $83,632 attributable to charitable 

contributions other than by cash or check (which included a 

$76,000 deduction claimed for the donation of the lake 

house). Petitioners attached to the return a summary 

appraisal report prepared by Richard S. Larkin of Larkin 

Appraisals, Inc., dated December 31, 1997, in support of the 

charitable contribution deduction claimed with respect to the 

lake house. 

Respondent’s Examination and the Notice of Deficiency

For their 1998 taxable year petitioners retained all documentation that a taxpayer exercising ordinary care and prudence in claiming a charitable contribution deduction would 

normally keep, and they maintained all records required 

under the Internal Revenue Code. The parties have stipulated that petitioners cooperated timely with all of respondent’s requests for witnesses, information, documents, 

meetings, and interviews during the examination of their 

1998 return. During the examination, respondent did not 

request access to the lake property. 

Respondent issued to petitioners a notice of deficiency for 

1998 disallowing the charitable contribution deduction of 

$76,000 claimed with respect to the donation of the lake 

house. The notice of deficiency stated in pertinent part: 

On Schedule A, line 18 of your return for the year ended December 31, 

1998, you claimed an itemized deduction of $96,258.00 for Gifts to Charity. 

It has not been established that any amount more than $7,632.00 qualifies 

for deduction under any section of the Internal Revenue Code. Therefore, 

your taxable income for the year ended December 31, 1998 is increased by 

$76,000. 

A schedule of examination adjustments attached to the notice 

of deficiency shows that respondent actually determined that 

petitioners were entitled to a deduction for charitable contributions totaling $20,258 for 1998 (rather than the $7,632 

referred to in the statement quoted above).

(471) ROLFS v. COMMISSIONER 477

4 Rule 72(a)(2) allows any party to serve on any other party a request to permit entry upon 

designated land or other property in the possession or control of the other party. 

The Pleadings

Petitioners filed a timely petition for redetermination 

alleging that they were entitled to a charitable contribution 

deduction of $76,000 related to their donation of the lake 

house. Petitioners subsequently filed an amended petition in 

which they averred that they were entitled to a charitable 

contribution deduction for their donation of the lake house of 

at least $235,350, the reproduction cost of the house, 

resulting in an overpayment of their 1998 tax liability by 

$39,672. Respondent filed an answer to amended petition 

denying the averments summarized above and asserting 

that, as an alternative to the determination in the notice of 

deficiency, petitioners were liable for a penalty for a gross 

valuation misstatement equal to 40 percent of the underpayment under section 6662(h). 

Pretrial Proceedings

As part of the pretrial proceedings, respondent requested 

permission for his expert witness to visit the lake property. 

On September 19, 2005, petitioners’ counsel informed 

respondent’s counsel that the lake property was then owned 

by Mrs. Gallagher. That same day, respondent’s counsel contacted Mrs. Gallagher and requested that respondent’s expert 

witness be permitted to enter the private road leading to the 

lake property for the purpose of viewing the site to aid in the 

preparation of a valuation report. Mrs. Gallagher denied the 

request. Respondent’s counsel informed petitioners’ counsel 

of this development, and petitioners’ counsel subsequently 

informed respondent’s counsel that petitioners were unable 

to arrange for respondent’s expert to gain access to the lake 

property. Respondent never made a request pursuant to Rule 

72 for permission to visit the lake property. 4

Valuation Experts

A. Richard S. Larkin

Petitioners’ expert witness, Richard S. Larkin, is president 

of Larkin Appraisals, Inc., and he prepared the summary 

appraisal report attached to petitioners’ 1998 return. Mr. 

478 135 UNITED STATES TAX COURT REPORTS (471) 

5There apparently is no dispute that this valuation would remain the same if the valuation 

date were changed to Feb. 10, 1998—the date that petitioners donated the lake house to the 

VFD. 

Larkin is a member of the Appraisal Institute, is a Wisconsin 

certified residential appraiser, and is qualified to give an 

opinion as to the value of real estate. 

In his original report Mr. Larkin used the so-called before 

and after approach to determine the value of the lake house; 

that is, treating the fair market value of the lake house as 

equal to the difference between fair market value of the lake 

property with the lake house and the fair market value of 

the lake property without the lake house. More specifically, 

Mr. Larkin determined the value of the lake property with 

all improvements to be $675,000, on the basis of a comparison to the direct sales of comparable properties. He then subtracted from this amount: (i) The value of the land (estimated at $550,000 on the basis of direct sales of comparable 

vacant land), (ii) the value of the structural improvements 

other than the lake house (estimated at $29,000 on the basis 

of their replacement cost less physical depreciation) and (iii) 

certain site improvements estimated at $20,000. By subtracting the value of the land and improvements other than 

the lake house (totaling $599,000) from the ‘‘direct sales’’ 

market value of the lake property with all improvements 

($675,000), Mr. Larkin arrived at what he considered the 

‘‘contributory value’’ of the lake house: $76,000, as of 

December 20, 1997. 5 As part of his analysis, Mr. Larkin also 

estimated that the reproduction cost of the lake house was 

$235,350. 

Mr. Larkin later supplemented his original report to 

acknowledge that during the period in question there existed 

in Wisconsin what he considered a submarket in which 

single-family residences were sold for the purpose of moving 

them to other locations. Mr. Larkin concluded that this 

market was not relevant to the valuation exercise he performed with regard to the lake house because the lake house 

was not going to be moved. 

B. Robert A. George

Respondent’s expert Robert A. George is a professional 

‘‘house mover’’. Mr. George has contracted to move numerous 

houses throughout Wisconsin, and he is qualified to give an 

(471) ROLFS v. COMMISSIONER 479

opinion as to the value of houses that are sold for the purpose of moving them to other locations. After considering the 

height of the lake house and his determination that the lake 

house could be moved only after removing the stone facade 

addition to the house and cutting down surrounding mature 

trees, Mr. George concluded that it would cost approximately 

$100,000 to move the lake house to another location in the 

Chenequa area. However, Mr. George concluded that in view 

of the high cost of land in the Chenequa area in comparison 

with the modest nature of the lake house, no one would purchase the lake house for the purpose of moving it, as any 

land close enough to render a move feasible would be too 

expensive to justify siting the modest lake house there. Mr. 

George expressed the further opinion that any buyer would 

pay no more than a nominal ‘‘courtesy’’ amount of $100 to 

$1,000 for the structure as of February 10, 1998, essentially 

for the purpose of ensuring that there was sufficient consideration to render the purchase contract binding. Mr. George 

also opined that any salvage value attributable to the structure (or components within the house) would be offset by the 

cost of labor to remove those components. 

C. Marcia Solko

Respondent’s expert Marcia Solko is a real estate specialist 

employed by the Wisconsin Department of Transportation. 

Her primary responsibilities were to arrange for the clearing 

or removal of all improvements (including houses) from real 

estate designated by the State of Wisconsin for highway 

construction projects. Ms. Solko is qualified to give an 

opinion as to the value of houses that are sold for the purpose of moving them to other locations. 

Taking many factors into account, including the height of 

the lake house, the stone facade addition, and the fact that 

the house sat on a concrete slab foundation, Ms. Solko concluded that it would be very costly to attempt to move the 

lake house, and she doubted that anyone would buy the lake 

house in order to move it to another property.

480 135 UNITED STATES TAX COURT REPORTS (471) 

6There is no dispute that the Village of Chenequa (and by extension the VFD) qualifies as 

a political subdivision of a State within the meaning of sec. 170(c). 

OPINION 

I. Charitable Contribution Deductions

Section 170(a)(1) provides in relevant part that a deduction 

is allowed for any charitable contribution, payment of which 

is made within the taxable year. Section 170(c)(1) defines the 

term ‘‘charitable contribution’’ to include a contribution or 

gift to or for the use of, inter alia, a political subdivision of 

a State, but only if the gift is made for exclusively public purposes. 6

The Supreme Court has defined ‘‘contribution or gift’’ for 

purposes of section 170 as follows: 

The legislative history of the ‘‘contribution or gift’’ limitation [of section 

170], though sparse, reveals that Congress intended to differentiate 

between unrequited payments to qualified recipients and payments made 

to such recipients in return for goods or services. Only the former were 

deemed deductible. The House and Senate Reports on the 1954 tax bill, for 

example, both define ‘‘gifts’’ as payments ‘‘made with no expectation of a 

financial return commensurate with the amount of the gift.’’ * * * [Hernandez v. Commissioner, 490 U.S. 680, 690 (1989).] 

Thus, ‘‘A payment of money generally cannot constitute a 

charitable contribution if the contributor expects a substantial benefit in return.’’ United States v. Am. Bar Endowment, 

477 U.S. 105, 116 (1986); see also Transam. Corp. v. United 

States, 902 F.2d 1540, 1543–1546 (Fed. Cir. 1990); Singer Co. 

v. United States, 196 Ct. Cl. 90, 449 F.2d 413 (1971). 

The Supreme Court has further instructed that in 

ascertaining whether a given payment or property transfer 

was made with the expectation of any return benefit or quid 

pro quo, we are to examine the external, structural features 

of the transaction, which obviates the need for imprecise 

inquiries into the motivations of individual taxpayers. Hernandez v. Commissioner, supra at 690–691. 

If a charitable contribution is made in property other than 

money, the amount of the contribution is generally the fair 

market value of the property at the time of the contribution. 

Sec. 1.170A–1(c)(1), Income Tax Regs. ‘‘[F]air market value’’ 

for this purpose ‘‘is the price at which the property would 

change hands between a willing buyer and a willing seller, 

neither being under any compulsion to buy or sell and both 

(471) ROLFS v. COMMISSIONER 481

having reasonable knowledge of the relevant facts.’’ Sec. 

1.170A–1(c)(2), Income Tax Regs. Restrictions on the property’s use or marketability on the date of the contribution 

must be taken into account in the determination of fair 

market value. See Cooley v. Commissioner, 33 T.C. 223, 225 

(1959), affd. 238 F.2d 945 (2d Cir. 1960); Deukmejian v. 

Commissioner, T.C. Memo. 1981–24; Dresser v. Commissioner, T.C. Memo. 1956–54; see also Rev. Rul. 85–99, 1985–

2 C.B. 83. 

II. The Parties’ Arguments

A. Respondent’s Position

Respondent contends that petitioners are not entitled to a 

deduction for a charitable contribution in connection with 

their donation of the lake house to the VFD because they 

anticipated and received a substantial benefit in exchange for 

the contribution; namely, demolition services. Petitioners 

therefore did not make a charitable contribution within the 

meaning of section 170(c), as interpreted in United States v. 

Am. Bar Endowment, supra, because the fair market value 

of the lake house as donated did not exceed the fair market 

value of the demolition services petitioners received from the 

VFD in exchange for the donation (quid pro quo argument). 

Respondent argues in the alternative that (1) the charitable 

contribution deduction in dispute is disallowed under section 

170(f)(3)(A) because petitioners transferred to the VFD less 

than their entire interest in the lake house; and (2) the lake 

house as donated to the VFD was worthless. 

B. Petitioners’ Position

Petitioners first contend that the burden of proof on all 

issues is shifted to respondent pursuant to section 7491(a). 

Petitioners assert that the Court should not consider 

respondent’s quid pro quo argument (to the effect that petitioners received a benefit in exchange for their donation) 

because this argument constitutes new matter that 

respondent raised for the first time in his opening brief. 

However, if respondent is allowed to raise the quid pro quo 

argument, petitioners contend that they donated property 

with a fair market value of $76,000 (according to a qualified 

appraisal) which they have shown should be valued at its 

482 135 UNITED STATES TAX COURT REPORTS (471) 

7 A $235,350 deduction would give rise to an overpayment for 1998. 

reproduction cost of $235,350 and that they received only an 

‘‘incidental benefit’’ in return. 7 Petitioners contend that section 170(f)(3)(A) is inapplicable because in transferring the 

lake house to the VFD with the right to demolish it, they 

transferred their entire interest in the property. 

III. Section 7491(a) Shift in the Burden of Proof

We consider as a preliminary matter petitioners’ contention that the burden of proof has shifted to respondent 

pursuant to section 7491(a). 

In general, the Commissioner’s determination as set forth 

in a notice of deficiency is presumed correct. Welch v. 

Helvering, 290 U.S. 111, 115 (1933). Rule 142(a)(1) sets forth 

the general rule that the burden of proof shall be on the taxpayer, except as otherwise provided by statute or determined 

by the Court, and except that the burden of proof shall be 

upon the Commissioner in respect of any new matter, 

increases in deficiency, and affirmative defenses. 

Section 7491(a)(1), however, provides an exception that 

shifts the burden of proof to the Commissioner as to any factual issue relevant to a taxpayer’s liability for tax if (1) the 

taxpayer introduces credible evidence with respect to such 

issue, sec. 7491(a)(1); and (2) the taxpayer satisfies certain 

other conditions, including substantiation of any item and 

cooperation with the Government’s requests for witnesses 

and information, sec. 7491(a)(2); see also Rule 142(a)(2). 

Petitioners contend that they have satisfied the requirements of section 7491(a) and the burden of proof as to all factual issues affecting the deficiency in their tax should be 

shifted to respondent. Respondent contends that because he 

was denied access to the lake property incident to his trial 

preparation, petitioners have not satisfied the section 

7491(a)(2)(B) requirement that they cooperate with ‘‘reasonable requests by the Secretary for witnesses, information, 

documents, meetings, and interviews’’. Specifically, 

respondent argues, petitioners have failed to show that they 

took reasonable steps to secure Mrs. Gallagher’s permission 

for respondent’s expert witness to view the lake property. 

Petitioners contend that they had no control over Mrs. Gallagher and that in any event section 7491(a)(2)(B) imposes a 

(471) ROLFS v. COMMISSIONER 483

cooperation requirement on taxpayers only during the examination process. 

A taxpayer bears the burden of proving that he or she has 

met the requirements of section 7491(a). See Richardson v. 

Commissioner, T.C. Memo. 2005–143; H. Conf. Rept. 105–

599, at 239 (1998), 1998–3 C.B. 747, 993. The legislative history underlying section 7491(a) states in pertinent part: 

the taxpayer must cooperate with reasonable requests by the Secretary for 

meetings, interviews, witnesses, information, and documents (including 

providing, within a reasonable period of time, access to and inspection of 

witnesses, information, and documents within the control of the taxpayer, 

as reasonably requested by the Secretary). Cooperation also includes providing reasonable assistance to the Secretary in obtaining access to and 

inspection of witnesses, information, or documents not within the control 

of the taxpayer (including any witnesses, information, or documents 

located in foreign countries). * * * [H. Conf. Rept. 105–599, supra at 240, 

1998–3 C.B. at 994.] 

We first observe that petitioners’ contention that the section 7491(a)(2)(B) requirement of cooperation extends only 

through the examination of their return is meritless. For 

purposes of section 7491(a)(2)(B), the requirement of cooperation continues through the pretrial proceedings in the Tax 

Court. See, e.g., Connors v. Commissioner, 277 Fed. Appx. 

122 (2d Cir. 2008), affg. T.C. Memo. 2006–239; Yearout Mech. 

& Engg., Inc. v. Commissioner, T.C. Memo. 2008–217; Krohn 

v. Commissioner, T.C. Memo. 2005–145; Lopez v. Commissioner, T.C. Memo. 2003–142, affd. on this issue 116 Fed. 

Appx. 546 (5th Cir. 2004). 

We likewise are not persuaded that petitioners have met 

their burden of proving that they fully cooperated with 

respondent’s reasonable requests during the pretrial phase. 

The parties stipulated in pertinent part that after respondent’s counsel informed petitioners’ counsel that Mrs. Gallagher had denied respondent’s request for access to the lake 

property, ‘‘Petitioners’ counsel subsequently advised 

Respondent’s counsel that no arrangements could be made by 

the Petitioners to have Respondent’s expert witness see the 

Property.’’ What is lacking in this record is any evidence of 

what effort, if any, petitioners undertook to assist in securing 

Mrs. Gallagher’s cooperation to permit respondent’s expert to 

visit the lake property. As reflected in the legislative history, 

Congress intended that the duty of cooperation extend to 

484 135 UNITED STATES TAX COURT REPORTS (471) 

8 Although petitioners’ counsel suggested to the Court that Mrs. Gallagher’s previous experience with the Internal Revenue Service occasioned her intransigence in the instant proceeding, 

counsel’s statements do not constitute testimony or evidence. See, e.g., U.S. Holding Co. v. Commissioner, 44 T.C. 323, 327 (1965). 

‘‘providing reasonable assistance to the Secretary in 

obtaining access to and inspection of * * * information * * * 

not within the control of the taxpayer’’. Petitioners offered no 

testimony concerning their efforts to obtain Mrs. Gallagher’s 

cooperation, stating only that they had a good relationship 

with her. Mrs. Gallagher did not testify. 8

In view of this evidentiary vacuum, petitioners have failed 

to show what ‘‘reasonable assistance’’ they offered, if any, 

with respect to respondent’s effort to obtain access to 

information from a person not within petitioners’ control. As 

a result, they have not satisfied the cooperation requirement 

of section 7491(a)(2)(B). Accordingly, we hold that section 

7491(a) is inapplicable. Since the condition of the lake property permeates all factual issues in this case, petitioners 

retain the burden of proof with respect to all factual issues. 

IV. Analysis

A. Respondent’s Quid Pro Quo Argument

1. Status as New Matter

We must first decide whether respondent is allowed to 

raise his quid pro quo argument, premised on United States 

v. Am. Bar Endowment, 477 U.S. 105 (1986), to the effect 

that petitioners are not entitled to any charitable contribution deduction because the fair market value of the property 

they donated did not exceed the fair market value of the benefit they received in exchange. Petitioners contend that the 

issue was untimely raised and therefore its consideration 

would be prejudicial to them. 

We have refused to consider an untimely raised issue when 

the opposing party is unfairly surprised and prejudiced 

because his defense against the issue requires the presentation of evidence different from the evidence relevant to the 

identified issues in the case. See Leahy v. Commissioner, 87 

T.C. 56, 64–65 (1986); Fox Chevrolet, Inc. v. Commissioner, 

76 T.C. 708, 733–736 (1981); Estate of Horvath v. Commissioner, 59 T.C. 551, 555–557 (1973). However, we are not persuaded that petitioners were unfairly surprised or prejudiced 

(471) ROLFS v. COMMISSIONER 485

9Petitioners raised their ‘‘new matter’’ objection in their answering brief, arguing that respondent raised the quid pro quo argument for the first time in his opening brief. 

10Petitioners also contend that if respondent is allowed to raise the quid pro quo argument, 

he should bear the burden of proof on the issue on account of his untimely raising of it. Because 

we conclude that petitioners raised the quid pro quo issue in their petition, there are no grounds 

to shift the burden of proof to respondent. 

by respondent’s quid pro quo argument. Starting with the 

petition and continuing through their opening brief, 9 petitioners have cited Scharf v. Commissioner, T.C. Memo. 1973–

265, and contended that a ‘‘small’’ or ‘‘incidental’’ benefit 

received by a donor ‘‘does not negate a finding of donative 

intent’’. Scharf is quintessentially a quid pro quo case, 

involving facts that are similar to those of the instant case 

in many respects. Scharf involved a charitable contribution 

deduction claimed for the donation of a building, partially 

destroyed by fire, to a volunteer fire department to be burned 

down for training purposes. Recognizing that the taxpayer’s 

receipt of a benefit from the building’s demolition necessitated a quid pro quo analysis, this Court observed that the 

circumstances presented ‘‘an exceedingly close question’’ but 

upheld the deduction, reasoning that the public benefit of 

firefighter training greatly exceeded the demolition benefit 

received by the donor taxpayer. 

By virtue of their reliance on Scharf from the outset, it is 

petitioners, not respondent, who first raised the quid pro quo 

issue. Petitioners cannot claim to have been unfairly surprised when respondent further developed the quid pro quo 

theory on brief, including analyzing post-Scharf developments in the caselaw such as the Supreme Court’s decision 

in United States v. Am. Bar Endowment, supra. Given petitioners’ reliance on Scharf, their contention from the outset 

that the benefit they received was ‘‘small’’ or ‘‘incidental’’, 

and Scharf’s characterization of the issue as a close one, we 

believe it was incumbent upon petitioners to proffer whatever 

evidence they had bearing upon the benefit they received 

from the donation of the lake house; and we conclude that 

petitioners were not unfairly surprised or prejudiced by 

respondent’s quid pro quo argument. 10 See Smalley v. 

Commissioner, 116 T.C. 450, 456–457 (2001); Ware v. 

Commissioner, 92 T.C. 1267, 1268 (1989), affd. 906 F.2d 62 

(2d Cir. 1990); Pagel, Inc. v. Commissioner, 91 T.C. 200, 211 

(1988), affd. 905 F.2d 1190 (8th Cir. 1990). In addition, 

Scharf sustained a charitable contribution deduction for the 

486 135 UNITED STATES TAX COURT REPORTS (471) 

11Sec. 1.170A–1(h)(1), Income Tax Regs., states: 

donation of a building to be burned down by a volunteer fire 

department, whereas respondent argues that such a deduction is precluded in petitioners’ case under Am. Bar Endowment. Since petitioners contend that Scharf supports a decision in their favor, it is appropriate and important to consider the application of a quid pro quo analysis in this case. 

We shall therefore consider the issue. 

2. Development of the Quid Pro Quo Test

Respondent argues that petitioners are not entitled to a 

charitable contribution deduction for their donation of the 

lake house because they anticipated and received a substantial benefit in exchange for the donation; namely, the demolition of the lake house on a site where they intended to 

rebuild. Respondent contends that the value of the demolition services received exceeded the value of the property petitioners transferred, eliminating any charitable intent from 

the transaction. As noted, respondent relies on United States 

v. Am. Bar Endowment, supra, and on section 1.170A–

1(h)(1), Income Tax Regs. 

In United States v. Am. Bar Endowment, supra at 116, the 

Supreme Court set forth the principle that a payment of 

money generally cannot constitute a charitable contribution 

if the contributor expects a substantial benefit in return. 

‘‘The sine qua non of a charitable contribution is a transfer 

of money or property without adequate consideration.’’ Id. at 

118. However, the Court also recognized that a taxpayer’s 

payment to a charitable organization that is accompanied by 

his receipt of a benefit may have a ‘‘ ‘dual character’ of a purchase and a contribution’’ if the payment exceeds the value 

of the benefit received in return. Id. at 117. The Court consequently adopted a two-part test (first articulated in Rev. 

Rul. 67–246, 1967–2 C.B. 104) for determining when part of 

a dual payment is deductible. ‘‘First, the payment is deductible only if and to the extent it exceeds the market value of 

the benefit received. Second, the excess payment must be 

made with the intention of making a gift.’’ Id. (internal 

quotations omitted). The Am. Bar Endowment test has since 

been incorporated into the regulations. See sec. 1.170A–1(h), 

Income Tax Regs.; 11 T.D. 8690, 1997–1 C.B. 68. The test also 

(471) ROLFS v. COMMISSIONER 487

No part of a payment that a taxpayer makes to or for the use of an organization described in 

section 170(c) that is in consideration for * * * goods or services * * * is a contribution or gift 

within the meaning of section 170(c) unless the taxpayer—

(i) Intends to make a payment in an amount that exceeds the fair market value of the goods 

or services; and 

(ii) Makes a payment in an amount that exceeds the fair market value of the goods and services. 

12We note also that the entirely voluntary nature of petitioners’ decision to demolish the lake 

house distinguishes their case from Scharf v. Commissioner, T.C. Memo. 1973–265. Mr. Scharf’s 

building had been partially destroyed by fire and was about to be condemned as unsafe when 

he decided to donate it to the local fire department for demolition in a training fire. ConContinued

applies where payment is made in property other than 

money. See Transam. Corp. v. United States, 902 F.2d at 

1543–1546. 

Petitioner had decided to demolish the lake house and construct another residence on the site when he contacted the 

VFD about donating the lake house to be burned down for 

training purposes. Consequently, examining the external features of the transaction, as we must, see Hernandez v. 

Commissioner, 490 U.S. at 690–691, we find that petitioner 

anticipated a benefit in exchange for the contribution: demolition of the lake house. On similar facts, this Court decided 

in a Memorandum Opinion, Scharf v. Commissioner, T.C. 

Memo. 1973–265, that the taxpayer was entitled to a charitable contribution deduction for the donation of a structure, 

equal to its value for insurance purposes. We reasoned in 

Scharf as follows: 

we conclude * * * that the benefit flowing back to petitioner, consisting 

of clearer land, was far less than the greater benefit flowing to the volunteer fire department’s training and equipment testing operations. * * * 

We think the petitioner benefited only incidentally from the demolition of 

the building and that the community was primarily benefited in its fire 

control and prevention operations. Consequently, on balance, we hold that 

the petitioner is entitled to a charitable contribution deduction. 

The test applied in Scharf, which examines whether the 

value of the public benefit of the donation exceeded the value 

of the benefit received by the donor, differs from the 

Supreme Court’s test announced 13 years later in United 

States v. Am. Bar Endowment, 477 U.S. 105 (1986). The Am. 

Bar Endowment test examines whether the fair market value 

of the contributed property exceeded the fair market value of 

the benefit received by the donor. The test applied in Scharf

has no vitality after Am. Bar Endowment. 12 Instead, we 

488 135 UNITED STATES TAX COURT REPORTS (471) 

sequently, Scharf’s use of the ‘‘insurance loss’’ value (less insurance proceeds received) to measure the value of the structure donated offers no basis for valuing the structure here, where no 

precontribution casualty was involved. 13 Because, as discussed infra, we conclude that the value of the lake house did not exceed 

the value of the demolition services, we need not address the second prong of the test set forth 

in United States v. Am. Bar Endowment, 477 U.S. 105 (1986): whether the excess of the value 

of the donation over the value of the benefit received was transferred with the intention of making a gift. 

must consider whether the value of the lake house as 

donated exceeded the value of the demolition services petitioners received. 13

3. Application of the Quid Pro Quo Test

a. Value of the Benefit Received

Petitioner testified that his investigation revealed that it 

would cost approximately $10,000 to $15,000 to have the lake 

house demolished and the debris removed. This estimate is 

consistent with those of both of respondent’s experts, who put 

the figure at approximately $10,000 to $12,000 (Ms. Solko) 

and $10,000 (Mr. George). 

Petitioners nonetheless dispute the conclusion that they 

saved demolition costs of at least $10,000 by virtue of their 

donation of the lake house to the VFD. Petitioner claimed in 

his testimony that the cost of the contract to construct the 

new house for Mrs. Gallagher included ‘‘$10,000 to $15,000’’ 

in excavation charges for clearing the remnants of the burn 

and the concrete foundation of the lake house. Petitioners 

argue on brief that these additional excavation costs demonstrate that petitioners did not save anything from the 

demolition resulting from the burning and therefore received 

no benefit from their donation of the lake house to the VFD. 

We reject this contention. First, the documentary evidence 

tends to undermine the claim that the construction contract 

for the new residence included $10,000 or more for excavation charges associated with clearing the remnants of the 

burn. The construction contract for the new house, as 

included in the record, does not contain any allocation of the 

total contract price for any specific cost—excavation, debris 

removal, or otherwise. Moreover, a preprinted portion of the 

contract covering ‘‘Building Site Conditions’’ has been lined 

through by the parties to the contract, creating an inference 

that the contract price did not cover any significant debris or 

foundation removal services. Second, two experts, plus 

(471) ROLFS v. COMMISSIONER 489

whomever petitioner consulted, estimated the cost of demolition and debris removal for the lake house as at least 

$10,000. We do not believe that debris removal alone 

accounted for these estimates. A much more plausible 

inference is that the cost of the labor and equipment for the 

demolition constituted a significant portion of the estimate. 

On this record, we are persuaded that petitioners saved at 

least $10,000 in the cost of demolition services as a result of 

their arrangements with the VFD for the donation of the lake 

house for burning. They accordingly received a benefit with 

a fair market value in that amount in exchange for the donation. 

b. Value of the Property Donated

Because petitioners received a substantial benefit in 

exchange for their donation of the lake house, their entitlement to any charitable contribution deduction under the Am. 

Bar Endowment test depends upon whether the value of the 

lake house as donated exceeded the value of the demolition 

services. As noted, the lake house’s value for this purpose is 

its fair market value at the time of the donation, as measured by the willing buyer/willing seller standard in section 

1.170A–1(c)(2), Income Tax Regs. Of particular importance 

here, the fair market value of contributed property must take 

into account any restrictions or conditions limiting the property’s marketability on the date of the contribution. See 

Cooley v. Commissioner, 33 T.C. at 225 (rejecting retail 

market value as fair market value of automobiles that could 

not be sold at retail); Deukmejian v. Commissioner, T.C. 

Memo. 1981–24 (rejecting real property valuation premised 

on property’s development value when property’s use 

restricted to open space); Dresser v. Commissioner, T.C. 

Memo. 1956–54 (rejecting real property valuation premised 

on commercial use when property’s use restricted to residential). The restrictions or conditions that must be taken into 

account include those imposed by the donor incident to the 

contribution of the property. See Deukmejian v. Commissioner, supra. 

Petitioners contend, and we agree, that their donation of 

the lake house to the VFD, without their conveyance of the 

underlying land on which it was sited, effected a ‘‘construcVerDate 0ct 09 2002 14:02 May 29, 2013 Jkt 372897 PO 20009 Frm 00019 Fmt 2847 Sfmt 2847 V:\FILES\ROLFS.135 SHEILA
490 135 UNITED STATES TAX COURT REPORTS (471) 

14 Respondent disputes whether the letters between petitioner and the VFD memorializing the 

donation of the lake house were sufficient to effect a constructive severance of the building from 

the underlying land. To effect a constructive severance of a building from land, the transfer ordinarily must be in a writing in a form sufficient for a conveyance of land. 2 Tiffany Real Property, sec. 624 (3d ed. 1939). Respondent contends that the letters between petitioner and the 

VFD were insufficient under the Wisconsin statute of frauds, Wis. Stat. Ann. sec. 706.02 (West 

2001), to convey such an interest. We disagree. Under Wis. Stat. Ann. sec. 706.04, a conveyance 

that does not satisfy every requirement of the statute of frauds may nonetheless be enforced 

where there has been detrimental reliance. See also Clay v. Bradley, 246 N.W.2d 142 (Wis. 

1976). The VFD demolished the lake house in reliance on petitioner’s Feb. 10, 1998, letter conveying the lake house to the VFD for that purpose. 

15The letter donating the lake house was dated Feb. 10, 1998, and the burndown by the VFD 

occurred 11 days later, corroborating Chief Wieczorek’s testimony concerning the expectation of 

the parties to the transfer. The contract for the construction of a new house on the site was 

signed approximately 5 weeks later. Petitioners’ contentions to the effect that there was no 

agreement or understanding that the house would be promptly burned down are unpersuasive. 

tive severance’’ of the structure from the land, recognized 

under Wisconsin law, even though the structure remained 

affixed to the land. See Fitzgerald v. Anderson, 51 N.W. 554 

(Wis. 1892); Smith v. Waggoner, 6 N.W. 568 (Wis. 1880); 2 

Tiffany Real Property, secs. 623–624 (3d ed. 1939). 14 By 

transferring the lake house to the VFD without the underlying land, however, petitioners created a substantial restriction or condition on the property’s marketability; namely, the 

lake house could not remain indefinitely on the land upon 

which it was sited. 

Petitioners attached two additional restrictions or conditions on the lake house incident to its donation; namely, the 

permissible use of the lake house was restricted to firefighter 

and police training exercises and there was a condition that 

the lake house be burned down relatively soon after the 

conveyance. Petitioner’s letter memorializing the transfer, 

though informal, stated that the lake house was to be used 

by the VFD ‘‘for training and eventually demolition’’, and VFD

Chief Wieczorek testified that he understood he could not use 

the lake house for any other purpose and that the burndown 

was to take place during the first part of 1998. 15 Thus, in 

addition to being severed from its underlying land, the lake 

house as donated could not be used for residential purposes 

and was subject to a condition that it be promptly burned 

down. 

Petitioners offered the appraisal of their expert, Mr. 

Larkin, in support of their claim that the lake house had a 

fair market value of at least $76,000 when donated. In his 

appraisal Mr. Larkin opined that the lake house had a 

‘‘contributory value’’ of $76,000 on the basis of a ‘‘before and 

(471) ROLFS v. COMMISSIONER 491

16 It would appear that petitioners also donated a temporary easement to the VFD granting 

a right of access to the lake property to conduct the training exercises and controlled burn. However, neither petitioners nor their expert addressed this element of the donation or suggested 

it had any value. 

after’’ approach to value, which treated the value of the 

donated lake house as equal to the difference between the 

fair market value of the lake property with the lake house 

and the fair market value of the lake property without the 

lake house. 

We find the Larkin appraisal to be unpersuasive evidence 

that the lake house had a fair market value of $76,000 as 

donated. While the ‘‘before and after’’ method used by Mr. 

Larkin has been accepted as an appropriate measure of the 

fair market value of donations of restrictive covenants on 

real property such as conservation easements, see, e.g., 

Symington v. Commissioner, 87 T.C. 892, 895 (1986); Schwab 

v. Commissioner, T.C. Memo. 1994–232; sec. 1.170A–14(h)(3), 

Income Tax Regs., petitioners cite no authority for the use of 

a ‘‘before and after’’ method in valuing a structure that has 

been severed from its underlying land and encumbered with 

additional restrictions on use. The ‘‘before and after’’ method 

as used in valuing easements treats the diminution in the 

value of the real property that arises from the easement as 

the measure of the easement’s fair market value. See 

Symington v. Commissioner, supra at 895. However, we are 

not persuaded that any diminution in the value of the lake 

property resulting from the removal of the lake house represents an accurate measure of the value of the lake house 

as donated to the VFD. Petitioners did not donate an easement—i.e., an intangible property right permanently encumbering the lake property; they donated a structure, severed 

from the lake property, with substantial restrictions and 

conditions on its use. 16 As described more fully below, the 

‘‘before and after’’ method employed by Mr. Larkin takes no 

account of these conditions and restrictions that would affect 

the marketability of the severed structure. See Cooley v. 

Commissioner, 33 T.C. 223 (1959); Deukmejian v. Commissioner, T.C. Memo. 1981–24; Dresser v. Commissioner, T.C. 

Memo. 1956–54. 

The Larkin appraisal states that ‘‘The interest valued is 

fee simple and unencumbered.’’ Mr. Larkin contends that the 

value of the lake property for the ‘‘donation purposes’’ to 

492 135 UNITED STATES TAX COURT REPORTS (471) 

17 In their amended petition, petitioners characterize their position as a claim that they are 

entitled to a deduction equal to the ‘‘reproduction’’ cost of the lake house. On brief, petitioners 

instead refer to ‘‘replacement’’ cost as the appropriate measure. Petitioners apparently treat ‘‘reproduction’’ and ‘‘replacement’’ cost as synonymous terms. In the circumstances, we find it unnecessary to consider any differences in the two concepts. 

which it was put was its ‘‘contributory value’’ of $76,000. Mr. 

Larkin reaches a ‘‘contributory value’’ of the lake house by 

starting with the fair market value of the lake property as 

a whole (land, the lake house, and all other improvements), 

estimated on the basis of sales of comparable residential 

properties (i.e., $675,000), and subtracting the fair market 

value of the land (also estimated on the basis of sales of comparable vacant sites) plus the depreciated cost of the 

improvements other than the lake house (i.e., $599,000). 

However, since the starting point of Mr. Larkin’s calculation 

was the market value of the lake property as a whole, as 

measured by sales of comparable properties where the houses 

could remain on their sites indefinitely and were available for 

residential use, the ‘‘contributory value’’ for the lake house he 

derived, by subtracting the value of the land and other 

improvements, necessarily valued the lake house on the basis 

of its being available for residential use and affixed to the 

site indefinitely. Thus, the $76,000 ‘‘contributory value’’ of 

the lake house postulated by Mr. Larkin at best reflects the 

value of the lake house before taking into account its severance from the underlying land, the prohibition on residential 

use, and the condition that it be burned down promptly. Consequently, the property interest Mr. Larkin appraised is not 

comparable to the property interest that petitioners donated 

to the VFD. 

Petitioners alternatively contend that the fair market 

value of the lake house as contributed to the VFD was 

$235,350, its reproduction cost as estimated by Mr. Larkin. 

Petitioners offer no expert testimony in support of this proposition. Mr. Larkin did not so opine; petitioners merely borrow 

his estimate of reproduction cost and assert on brief, relying 

on Estate of Palmer v. Commissioner, 839 F.2d 420 (8th Cir. 

1988), revg. 86 T.C. 66 (1986), and First Wis. Bankshares 

Corp. v. United States, 369 F. Supp. 1034 (E.D. Wis. 1973), 

that because the lake house was ‘‘unique’’ and was ‘‘special 

use’’ property in the hands of the donee, reproduction cost is 

the appropriate measure of its value. 17

(471) ROLFS v. COMMISSIONER 493

Petitioners’ reliance on Estate of Palmer and First Wis. 

Bankshares Corp. is misplaced. There was nothing unique 

about the lake house comparable to the unique status of the 

properties at issue in those cases—in Estate of Palmer, a 

building integral to a college campus and its activities; and 

in First Wis. Bankshares Corp., a bank structure suitable 

only to some public use. According to the expert testimony in 

the record, the lake house was a typical, albeit modest, residence for its area; by their own admission, petitioners contemplated residing in it after remodeling. In addition, the 

structures at issue in both cases petitioners cite were 

donated without having been constructively severed from the 

land on which they were sited. Consequently, the circumstances of this case lend no support to the use of reproduction cost, an approach that also fails to account for the 

conditions petitioners placed on the lake house incident to 

the donation. 

Instead, the circumstances of this case bring it squarely 

within the Cooley line of cases which require that restrictions 

or conditions affecting the marketability of donated property 

be taken into account in determining the value of the 

donated property. See Cooley v. Commissioner, supra; 

Deukmejian v. Commissioner, supra; Dresser v. Commissioner, supra; see also Rev. Rul. 85–99, supra. ‘‘[P]roperty 

otherwise intrinsically more valuable which is encumbered 

by some restriction or condition limiting its marketability 

must be valued in light of such limitation.’’ Cooley v. 

Commissioner, supra at 225. 

We consider first the impact of the severance of the lake 

house structure from the underlying land. The price at which 

the lake house would change hands would undoubtedly be 

affected by the condition that the structure could not remain 

affixed to its underlying land indefinitely. Petitioners offered 

no evidence concerning the impact of this condition. 

Respondent offered the testimony of two experts in the field 

of house moving regarding the price at which the lake house 

would likely sell if required to be moved from its existing 

site. Both house moving experts concluded that the likelihood 

of a buyer’s purchasing the lake house to move it from the 

site was virtually nil, because the characteristics of the lake 

house and its site rendered a relocation of the structure 

infeasible. We are persuaded that the expert testimony conVerDate 0ct 09 2002 14:02 May 29, 2013 Jkt 372897 PO 20009 Frm 00023 Fmt 2847 Sfmt 2847 V:\FILES\ROLFS.135 SHEILA
494 135 UNITED STATES TAX COURT REPORTS (471) 

18 Respondent’s other expert, Ms. Solko, speculated on the lake house’s salvage value on the 

assumption that certain features might exist. By contrast, Mr. George examined Mr. Larkin’s 

appraisal of the lake house, which included photographs and a description of its features, and 

the VFD’s videotape of its training exercises, which depicts the lake house in greater detail than 

the photographs in the Larkin appraisal. 

cerning the market for the lake house as a structure to be 

moved provides a reasonable basis for estimating the impact 

on fair market value of the severance of the lake house from 

its underlying land. We find that the severance rendered the 

lake house virtually worthless. 

As for the impact on the lake house’s fair market value of 

the remaining conditions petitioners imposed incident to the 

donation (the restriction of use to firefighter and police 

training exercises and the condition that the structure be 

promptly burned down), there is insufficient evidence in the 

record to support anything beyond speculation. We are persuaded, however, that the impact on fair market value of the 

foregoing encumbrances would be adverse rather than beneficial. Finally, as for the possibility that the lake house as 

encumbered by petitioners’ restrictions had a fair market 

value equal to its salvage value, respondent’s expert Mr. 

George provided expert testimony to the effect that the lake 

house’s salvage value was zero. On the basis of his examination of photographs and a video of the lake house, and a 

description of its features, Mr. George opined that the value 

of any salvageable materials would be offset by the costs of 

removing them. 18 As a consequence, we are persuaded by 

the evidence that the lake house had no salvage value. 

4. Conclusion

On the basis of the entire record, we conclude that 

respondent prevails on his quid pro quo argument. We are 

persuaded by the evidence that petitioners anticipated a 

substantial benefit in exchange for their donation of the lake 

house, in the form of demolition services worth approximately $10,000, and that the fair market value of the lake 

house as donated did not exceed that figure. Petitioners have 

failed to prove the lake house had a fair market value 

exceeding $10,000, because the expert testimony they offered 

to prove value failed to account for substantial conditions 

and restrictions imposed on the property incident to its donation, including in particular its severance from the underVerDate 0ct 09 2002 14:02 May 29, 2013 Jkt 372897 PO 20009 Frm 00024 Fmt 2847 Sfmt 2847 V:\FILES\ROLFS.135 SHEILA
(471) ROLFS v. COMMISSIONER 495

19Given our conclusion that petitioners’ charitable contribution deduction is precluded under 

United States v. Am. Bar Endowment, 477 U.S. 105 (1986), we need not decide respondent’s alternate contentions that the deduction is disallowed pursuant to sec. 170(f)(3) or on account of 

the worthlessness of the lake property at the time of the donation. 

lying land. The remaining evidence supports a conclusion 

that the fair market value of the lake house as encumbered 

at the time of the donation was de minimis. The lake house 

could not remain on the land on which it was sited, could not 

be used for residential purposes, yet had no value as a structure to be moved or any salvage value. We therefore hold 

that petitioners are not entitled to any charitable contribution deduction for the donation of the lake house because 

they have not satisfied the Am. Bar Endowment test:

they have not shown that the market value of the property they donated exceeded the market value of the benefit 

they received in exchange. 19

B. Accuracy-Related Penalty

Respondent determined that petitioners are liable for an 

accuracy-related penalty under section 6662(a) and amended 

his answer to assert petitioners’ liability for a penalty under 

section 6662(h) for a gross valuation misstatement. 

Respondent argues on brief in support of the section 6662(a) 

penalty that petitioners have an underpayment that is 

attributable to negligence or disregard of rules or regulations 

under section 6662(b)(1), to a substantial understatement of 

income tax under section 6662(b)(2), and/or to a substantial 

valuation misstatement under section 6662(b)(3) that is augmented by section 6662(h) because it is a gross valuation 

misstatement. 

Under section 6664(c), however, generally no penalty is 

imposed under section 6662 with respect to any portion of an 

underpayment if it is shown that there was reasonable cause 

for such portion and that the taxpayer acted in good faith 

with respect to such portion. This reasonable cause exception 

generally does not apply in the case of a substantial or gross 

valuation overstatement with respect to property for which a 

charitable contribution deduction was claimed under section 

170 unless the claimed value of the property was based on 

a ‘‘qualified appraisal’’ by a ‘‘qualified appraiser’’ and the taxVerDate 0ct 09 2002 14:02 May 29, 2013 Jkt 372897 PO 20009 Frm 00025 Fmt 2847 Sfmt 2847 V:\FILES\ROLFS.135 SHEILA
496 135 UNITED STATES TAX COURT REPORTS (471) 

20Pars. (2) and (3) of sec. 6664(c) as in effect for 1998 were redesignated pars. (3) and (4), 

respectively, by the Health Care and Education Reconciliation Act of 2010, Pub. L. 111–152, sec. 

1409(c)(1)(A), 124 Stat. 1069. 

payer made a good faith investigation of the value of the 

contributed property. See sec. 6664(c)(2) and (3). 20

The determination of whether a taxpayer acted with 

reasonable cause and in good faith ‘‘is made on a case-by-case 

basis, taking into account all pertinent facts and circumstances.’’ Sec. 1.6664–4(b)(1), Income Tax Regs. Petitioners complied with all reporting requirements, maintained 

adequate books and records, and fully disclosed the nature of 

the charitable contribution deduction in dispute on their 

return. The legal issues raised by their deduction claim were 

not settled. Importantly, in Scharf v. Commissioner, T.C. 

Memo. 1973–265, this Court held that a charitable contribution deduction was available for the donation of a building 

(albeit partially destroyed) to a volunteer fire department for 

demolition in firefighter training exercises. While the validity 

of the test applied in Scharf may have been subject to doubt 

after the Supreme Court’s refinement and clarification of the 

quid pro quo analysis of charitable contribution deductions in 

United States v. Am. Bar Endowment, 477 U.S. 105 (1986), 

no Federal court had reconsidered or questioned the Scharf

holding since the Supreme Court’s examination of the issue 

in 1986. The parties apparently do not dispute that the 

deduction petitioners claimed on their return was based on 

a qualified appraisal by a qualified appraiser. While petitioners (like their appraiser) overlooked the impact on the 

lake house’s value of the restrictions attached to the property 

when it was donated, a reasonable argument could be made 

that the house had value—which supports a finding that 

petitioner’s investigation of the value of the contributed property was at least in good faith. See sec. 6664(c)(2)(B). On balance, given all the facts and circumstances, including the 

uncertain state of the law, we find that petitioners acted 

with reasonable cause and in good faith. Accordingly, they 

are not liable for any penalty under section 6662.

(471) ROLFS v. COMMISSIONER 497

To reflect the foregoing, 

An appropriate decision will be entered

f .